Tax Notes Quotes Zhanna Ziering on FinCEN Virtual Currency Notice
Caplin & Drysdale

Tax Notes Quotes Zhanna Ziering on FinCEN Virtual Currency Notice

Date: 1/7/2021

A recent announcement by the Financial Crimes Enforcement Network that it will amend regulations to make virtual currency accounts subject to foreign bank account reporting requirements isn’t surprising, but significant questions remain surrounding the rulemaking.

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“It was long time coming, with the revision of [Form] 1040 to include the virtual currency question, and other activity by FinCEN,” Zhanna Ziering of Caplin & Drysdale said, pointing to a December 2020 notice of proposed rulemaking on convertible virtual currencies and digital assets with legal tender status. “With the IRS’s enforcement in connection with virtual currency transactions, it was logical that this step was forthcoming.” 

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According to Ziering, one important differentiation between virtual currency tax return reporting and FBAR reporting is the increased penalties under the latter. FBAR penalties may be as high as 50 percent of an account’s highest balance per violation.

“If this is on a tax return, at the end of the day . . . [at most] it’s unpaid income and they can hit you with fraud penalty on the unpaid tax,” Ziering said, acknowledging that criminal prosecution is also possible in some cases. “Punishment for not disclosing virtual currency on a tax return is ultimately not significant enough, whereas putting it on the FBAR gives the government pretty hefty penalties.”

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Although she was not surprised by the announcement itself, Ziering said the timing of the bare-bones notice released at the end of 2020 was puzzling.

“This by no means qualifies as a [notice of proposed rulemaking]. However, then why release it on 12/31? It felt so uncooked and divulged no information other than the basic fact. It just seemed very odd,” Ziering said. “One speculation was that it was done in order to make the reg amendment effective for calendar year 2020. . . . But given the notice and comment process, how likely is the reg to be finalized by April 15?”

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Ziering said she was interested in seeing how virtual currency would be incorporated into 31 CFR section 1010.350 — specifically, how an account will be determined to be foreign. That provision defines a foreign country to include all geographical areas located outside the United States.

“I am not sure that the current definition of foreign country under 1010.350(d) . . . is necessarily workable in a context of a virtual currency,” Ziering said.

The notice states that the regs will be changed “to include virtual currency as a type of reportable account,” which also led Ziering to wonder.

“It sounds like they are going to try and shoehorn it under the definition of an account, and I’m just not sure how they are going to do that,” Ziering said. “It’s much more logical that they are going to take the approach that a wallet is an account.”

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How the value of an account would be measured is also unclear in the virtual currency context, according to Ziering. FBARs must be filed and amounts reported for foreign accounts with maximum values over $10,000. But converting virtual currency amounts, whose volatility is well documented, to U.S. dollars would require new instructions, she said.

“There are issues specific to virtual currency that FinCEN is going to have to work through in the regulation and with respect to the instructions. Otherwise, it’s going to cause tremendous confusion,” Ziering said.

For the full article, please visit Tax Notes’ website (subscription required).

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